Strategic management competitiveness globalization concepts and case 10e chapter 7

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THE STRATEGIC MANAGEMENT PROCESS

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● Explain the popularity of merger and acquisition

strategies in firms competing in the global economy.

● Discuss reasons why firms use an acquisition

strategy to achieve strategic competitiveness.

● Describe seven problems that work against

achieving success when using an acquisition strategy.

KNOWLEDGE OBJECTIVES

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● Name and describe the attributes of effective

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TECHNOLOGY GIANTS’ ACQUISITION STRATEGIES AND THEIR OUTCOMES

■ Online social networks, such as Facebook, have caused Procter & Gamble (P&G) to reallocate their advertising resources away from television to more digital formats.

■ When Microsoft announced that it would acquire Skype Global S.A.R.L., the leading Internet

telecommunications company for $8.5 billion,

there were both positive and negative attributions about the deal in the media.

OPENING CASE

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■ Because Skype was founded and headquartered outside the U.S (Luxembourg), Microsoft was able

to use cash that was not repatriated into the U.S to pay for the deal, and in so doing, it avoided paying U.S income tax

■ The Skype investment seems to be a bargain; the $8.5 billion represents a cost of $14.70 per

customer Comparatively, when Skype was bought

by eBay in 2005, it paid $45.60 per user

OPENING CASE

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OPENING CASE

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■ Facebook has a somewhat different approach to acquisitions, having recently

purchased Snaptu Snaptu provides application software for services such as Facebook, Twitter, and LinkedIn, which allows these services to be featured on phones

■ Facebook has made 11 acquisitions since 2007; however, almost none of the acquired

companies’ services has survived as independent businesses

OPENING CASE

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■ Online commerce is moving into a oriented retail phase, of which firms such as

consumer-Facebook and Amazon are seeking to take

advantage

■ Acquisitions are a quick way to move into the space that these tech giants see evolving, such as Microsoft seeking to broaden its communication base, Google expanding beyond search to

experiment with new models of advertising, and Facebook’s attempts to learn from the human

capital that they are able to acquire.

OPENING CASE

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Popular strategy in the U.S for many

years

Source of firm growth and

above-average returns

Some believe that M&A strategies

played a central role in the

restructuring of U.S businesses during the 1980s and 1990s and that they

continue generating benefits in the

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Heavily influenced by external environment

Tight credit markets Political changes in foreign countries’ orientation toward M&A

During the recent financial crisis, tightened credit markets made it more difficult for

firms to complete “megadeals” (> $10

billion)

Then U.S deals picked up in 2011, where

“first-quarter deal volume rose 45% to

POPULARIT Y OF MERGER

AND ACQUISITION

STRATEGIES

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Cross-border acquisitions heighten during currency imbalances, from strong

currency countries to weaker currency

countries, such as the U.S.

Firms use M&A strategies to create value for all stakeholders

M&A value creation applies equally to all strategies (business-level, corporate-level, international, and cooperative)

AND ACQUISITION

STRATEGIES

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Can be used because of uncertainty in the competitive landscape

Increase market power because of competitive threat

Spread risk due to uncertain environment

Shift core business into different markets

Manage industry and regulatory changes Intent:

Increase firm’s strategic competitiveness and value; historically returns are close to zero so it rarely works as planned

AND ACQUISITION

STRATEGIES

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M&A value creation is challenging

GOOD NEWS: Shareholders of ACQUIRED firms often earn above-average returns from acquisitions

BAD NEWS: Shareholders of ACQUIRING

firms earn returns that are close to zero: In 2/3 of all acquisitions, the acquiring firm’s stock price fell immediately after the

intended transaction was announced

This negative response reflects investors’ skepticism about projected synergies being captured

AND ACQUISITION

STRATEGIES

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MERGERS, ACQUISITIONS, AND

TAKEOVERS: WHAT ARE THE

DIFFERENCES?

MERGER

Two firms agree to integrate their operations on

a relatively co-equal basis

 There are few TRUE mergers because one firm usually dominates in terms of market

share, size, or asset value

ACQUISITION

One firm buys a controlling, 100 percent interest

in another firm with the intent of making the

acquired firm a subsidiary business within its

portfolio

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MERGERS, ACQUISITIONS, AND

TAKEOVERS: WHAT ARE THE

RATIONALE FOR STRATEGY

Pre-announcement returns of hostile

takeovers are largely anticipated and

associated with a significant increase in the bidder’s and target’s share price

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REASONS FOR ACQUISITIONS

Increased Market Power

Market Leadership results from Market Power

Factors increasing market power:

● The ability to sell goods or services above competitive levels

● Costs of primary or support activities are

below those of competitors

● Size of the firm, resources, and capabilities

to compete in the market and share of the

market

● Purchase of a competitor, a supplier, a

distributor, or a business in a highly related industry

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Market power is increased by:

● Horizontal acquisitions: other firms in the same industry

McDonald’s acquisition of Boston Market (successful?)

●Vertical acquisitions: suppliers or distributors of the acquiring firm

Walt Disney Company’s acquisition of Fox Family Worldwide

●Related acquisitions: firms in related industries

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Horizontal

Acquisitions

• Acquirer and acquired companies compete in the same industry

• Firm’s market power is increased by exploiting:

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of one or more of the firm’s goods or

services

 Increases a firm’s market power by

controlling additional

parts of the value chain

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in a highly related industry

• Value creation takes place through the synergy that is generated by integrating resources and capabilities

 Because of the difficulty in implementing synergy,

related acquisitions are often difficult to implement

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Horizontal, Vertical, and Related

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Overcoming Entry Barriers

Entry Barriers

• Factors associated with the market or with the firms operating in it that increase the expense and difficulty faced by new ventures trying to enter that market

• Are often made to overcome entry barriers

• Can be difficult to negotiate and operate because of the differences in foreign cultures

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• The Strategic Focus underscores the different approaches to cross- border acquisitions by Chinese,

Indian, and Brazilian corporations.

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Cost of New Product

Development and Increased Speed to Market

• Internal development of new products is often perceived as high-risk activity.

• Acquisitions allow a firm to gain access to new and current products that are new to the firm.

• Compared with internal product development, acquisitions:

• Are less costly

• Have faster market penetration

• Have more predictable returns due to the acquired firms’ experience with the products

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Lower Risk Compared to

Developing New Products

• Outcomes for an acquisition can be more

easily and accurately estimated than the

outcomes of an internal product development process.

• Acquisition strategies are a common means of avoiding risky internal ventures and risky R&D investments.

• Acquisitions may become a substitute for

innovation, and thus should always be strategic

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• Both related diversification and unrelated

diversification strategies can be

implemented through acquisitions.

• The more related the acquired firm is to the acquiring firm, the greater is the probability that the acquisition will be successful.

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Reshaping the Firm’s Competitive Scope

Reducing a company’s dependence on

specific markets alters the firm’s

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Learning and Developing New

Capabilities

An acquiring firm can gain capabilities that the firm does not currently possess:

• Special technological capability

• A broader knowledge base

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PROBLEMS WITH ACQUISITIONS

Integration Difficulties

Inadequate Target Evaluation

Large or Extraordinary Debt

Inability to Achieve Synergy

Too Much Diversification

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60% produce disappointing results

20% are clear failures, with technology

acquisitions reporting even higher failure rates

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1 select the “right” target

2 avoid paying too high a premium (by doing appropriate due diligence)

3 integrate the operations of the acquiring

and target firm effectively

4 retain the target firm’s human capital, as illustrated by Facebook’s approach described in the opening case

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PROBLEMS IN ACHIEVING

ACQUISITION SUCCESS

Integration Difficulties

Integration challenges include:

cultures

systems

(particularly when management styles differ)

status of the newly acquired firm’s

executives

acquired firm’s capabilities and

reducing its value

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• The process of evaluating a target firm for acquisition

• Ineffective due diligence may result in paying an

excessive premium for the target company

Evaluation requires examining:

• The financing of the intended transaction

• The differences in culture between the firms

• The tax consequences of the transaction

• Actions necessary to meld the two workforces

• BOTH the accuracy of the financial position and

accounting standards used AND the quality of the strategic fit and the ability of the acquiring firm to

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PROBLEMS IN ACHIEVING

ACQUISITION SUCCESS Large or Extraordinary Debt

• Junk bonds: Financing option whereby risky

acquisitions are financed with money (debt) that

provides a large potential return to lenders

(bondholders)

• High debt (e.g., junk bonds) can:

• Increase the likelihood of bankruptcy

• Lead to a downgrade of the firm’s credit rating

• Preclude investment in activities that contribute to the firm’s long-term success such as:

• Research and development

• Human resource training

• Marketing

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